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Home Equity Loan

How to unlock the equity in your home for other purposes.

A home equity loan is the honest term for a homeowner loan- the money you borrow is based on the equity you hold in your property. As such, the amount you can borrow is a function of the price you bought your property, the amount it's risen (or fallen) in value, and the amount of the mortgage you have yet to pay off.

A home equity loan, also known as a home owner loan, is a secured loan based on the value of your property. Not surprisingly, you'll either have a mortgage or outright ownership of your home to be eligible, and if you fail to keep up repayments, then you may lose your home, so this is not a lending solution to be taken lightly; indeed usually an unsecured loan is the answer unless you're borrowing quite a lot of money.

The big question here is how much equity you have in your home. For example, let's suppose you purchased your home for £100,000 with a £50,000 mortgage 5 years ago. Your home has appreciated in value to £120,000; and you've paid off £6,000 of the mortgage (that's the part of the mortgage actually applicable to the house itself- as well as the mortgage interest). You now have a £44,000 mortgage on a £120,000 home, leaving you with equity in the property of £76,000.

The first thing you'll notice is that despite only shelling out £6,000, you have over 50% more equity in the property than when you started. This is why common wisdom suggests that investing in property is sound sense. A home equity loan, available not just from your existing mortgage provider but indeed from many banks and building societies will allow you to unlock some of that equity for the holiday, home improvements or car you always wanted.

But please beware- house prices are flattening out, and whilst many economists are optimistic about house price levels, some do predict a price slump. If you borrow heavily against your home using a home equity loan, and then furthermore prices go into reverse, the illustration above could be enacted in reverse- you could find yourself owing more than the value of your house- the classic negative equity trap.